Tax Day 2017 has come and gone and, along with many other Americans, you were expecting a little more of a kickback on the refund check. Also like many other Americans, you may want to take steps to ensure a bigger refund, but life gets in the way and before you know it, it’s Tax Day Next Year.
One thing to keep in mind is that a tax refund is a return of your own money, so the apparent windfall is just money you’ve already spent coming back to you with no interest accrued. It’s not the best investment vehicle by a long shot. Then again, like many Americans, a tax refund may be the biggest chunk of money resembling savings some years. However, with some preparation and planning early in the tax year, you may be able to plan for a bigger refund. It’s time to take a look at tax withholding.
The first question to ask yourself is this: do you want a bigger paycheck or a bigger tax return? It’s estimated that somewhere between 56 and 76% of us live from payday to payday. While that would seem to make a bigger paycheck attractive, it’s only a short-term outlook unless you’re actively — and reliably — saving a portion of that. You completed a W-4 when you started your job, telling your employer something about your tax situation, so that payroll knew how much tax to withhold from each check. When they withhold more, your check is smaller, but your chances at a bigger tax return are higher. Conversely, the less that’s withheld, the bigger your weekly pay.
Review Your Allowances
The fact is, your situation has almost certainly changed since you completed your W-4. The form is your declaration that you’re eligible for certain tax allowances. These are things such as:
- Filing as head of a household
- Personal allowances as well as those for spouse, children, and other dependents
- Child care and dependent care expenses
- Having a second job
- Having a working spouse
Every allowance you claim puts a bit more money back on your paycheck. Every allowance you don’t claim results in more withheld tax week to week, but maximizes your shot at a bigger tax refund.
The best approach is a disciplined plan for savings. However, that may mean cash on hand that gets spent in a moment of weakness or emergency. If the Big Refund method works better in your situation, it may be time to revisit your W-4.